Everything you need to know about insuring your vacant property

The commercial property vacancy rate in 2018 hovered between 10%-20% depending on the region.

As an investment property owner, you know that the time may come when your property could become vacant. Whether it is residential or commercial property.

The vacancy could be due to a slow economy, and prospective tenants cannot afford the rent. Or perhaps your property is due for a remodel and is sitting vacant while you line up the contractors.

Whatever the case may be, a vacant property is at a higher risk of a loss. Insurers tend to see more severe and frequent claims in vacant properties.

It is crucial to put in place appropriate safety measures to protect your property from these perils. One of these safety measures, designed to safeguard your investment, is a property and liability insurance policy.

Now, you could be thinking - " of course I have insurance! I've had it ever since I bought the building". Even though you have an insurance policy on your building, you might not be insuring it properly.

Have you adjusted your coverage to accommodate the vacancy?

After reading this blog post, you will be able to review your current policy. The goal is to make sure that your property is adequately protected.

We will talk about the way that a vacancy affects your coverages. As well as the necessary coverages that you need and what policies provide the solution to the "vacancy problem."

Are you ready to make sure that your building is insured correctly?

Let's get started!

Why does vacancy represent a problem?

A vacant property represents a much higher risk to the insurance company, and frankly to the general public than an occupied one.

A vacant building attracts squatters who may use the abandoned property to do all kinds of unsavory activities. Perhaps related to drugs, as well as vandalism.

Squatters and vandal may spoil what could be an otherwise well-maintained building.

Of course, it is a big problem for an insurance company. The insurer takes on a much more significant risk on such a property than on your regular occupied building.

The most common losses for vacant properties include break-ins, vandalism, fire and liability claims.

What happens if your property suddenly becomes vacant?

First, let's define what "vacant" means in the insurance world.

In a commercial insurance policy, a building is typically defined as vacant if it is 70% vacant for longer than 60 days. This definition alone comes as a surprise to many.

The word vacant is often associated with "fully empty" not "partially empty" concept.

What many property owners do not realize is that vacancy can severely impact your insurance coverage. Due to a high risk of claim activity for a vacant property, insurance companies need to charge a higher rate for such a risk.

A carrier cannot constantly check the occupancy of the property for every policy they write. So they include a so-called "vacancy clause" in the wording of the policy. This clause limits some coverages while eliminating the others.

The provision limits carrier's exposure. The insurance company will not be responsible for covering unintended risk. Unfortunately, the gap in coverage that this clause creates can lead to a costly, uncovered claim.

A standard property policy will no longer provide the following coverages for a vacant building: vandalism, glass breakage, sprinkler leakage, break-in, and theft or water damage.

Loss payment for other coverages is typically reduced by 15% (on top of policy's deductible).

In the next section, we'll talk about the solutions that you have at your disposal. Strategies that will help reduce the possible financial impact of an uncovered loss to your vacant property.

Insurance coverage solutions for a vacant property

Whether your property has suddenly gone vacant or has been sitting vacant for a while, you are still able to insure it.

The policy will be pricier than a regular property policy. However, it is still much more affordable then suffering an uncovered total loss.

When it comes to covering your vacant property, you have a few options.

Policy for a vacant property

The best insurance solution for a vacant property is securing a vacant property policy. This policy will provide you with the coverage that you need including coverage against vandalism, break-ins, etc.

Also, consider if you need contents coverage for the property.

Do you have any property left in the building that belongs to you? Make sure to mention it to your insurance agent so all property can be adequately protected.

It's important to not forget about premises liability insurance for the vacant building. With the building unoccupied, there is a higher likelihood of liability claims such as trip and fall, or an injury.

Another critical coverage that is often forgotten when it comes to vacant property insurance is business interruption (or business income) coverage.

For example, let's assume that you finally found a tenant for your vacant property and signed the lease. The tenant is not due to move in until a month from today.

If a fire breaks out and causes the location to no longer be available for a tenant to move into, you would lose income. Keep in mind that the property is still insured as vacant until a tenant actually moves in.

Vacancy Permit

Most companies will agree to add a vacancy permit endorsement to your policy for an additional premium. This endorsement is usually given for a set period of time (for example 90 days).

The endorsement gives back some of the coverages on the named peril basis that the vacancy clause takes away. Please see your policy or discuss with your agent for exact wording).

Just like the vacancy policy, the vacancy permit will offer coverage on an actual cash value basis as opposed to an agreed value which many insureds initially request.

What is actual cash value (ACV)?

As a quick reminder, actual cash value refers to a basis that the insurance carrier uses to evaluate your property. ACV is the cost of replacing or repairing the property less depreciation.

Builders Risk policy

A builders risk policy covers your building while under construction or while it is undergoing renovations.

Few situations where your building is vacant may require a Builders Risk policy as opposed a Vacant Property policy.

Flipping properties

In recent years it has become quite popular to purchase properties, renovate them and resell them at a higher price. As such, you never intend to lease this type of property to a tenant.

The building would remain vacant during the renovations.

In this case, even though the property is vacant, you need to purchase a builders risk policy. This type of policy is designed to cover the property itself, as well as construction materials stored on the property.

Another situation that would require a builders risk policy is purchasing a bank-owned property. You need coverage while renovating it before you start your business operations there.

How to protect your vacant property

Wherever you go, it's usually pretty easy to spot the buildings that are vacant.

They often stand out, and not in a good way. The paint may be peeling; the front steps could be falling apart. Unruly shrubs and other vegetation growing in the pathways or the front of the building.

A general sense of poor maintenance and disrepair surrounds the building.

It's easy to see why unoccupied buildings are so attractive to squatters - they are easy to find, and it's likely that they won't be disturbed. Special care should be placed in taking care of the vacant property.

Not only so it is attractive to potential tenants but also as a way of protecting your investment. As a bonus, a well maintained vacant property will save you some money on your insurance premiums.

Below are a few ways to protect your vacant property -

- If your building has parking, rope off the entrance or put obstacles to prevent others from using your property as their personal parking lot

- Do regular walkthroughs at the property to maintain the sense that the building is not abandoned. Hire a management company to help out

- Maintain the front area of the building including the parking spaces and any walkways clear of debris, snow or ice.

- If possible install a temporary fence around the building to keep squatters out

- Keep exterior lights on during the night as well as any exit signs and emergency lighting

- Do periodic checks of sprinklers and smoke detectors. Make sure that fire alarm and security alarm are linked to central monitoring service. In climates where the weather gets freezing, a minimum temperature should be kept to avoid damaging the sprinklers

- Another reason to maintain a minimum temperature is to prevent bursting pipes

- Security guards may be hired to monitor the property at night

Conclusion

As you can see a vacant property requires a special insurance policy or an endorsement. Lack of coverage can result in a denied claim or an only partially covered loss.

If your building is at the risk of becoming vacant or has recently gone vacant, notify your insurance agent right away. Remember the definition of vacancy - 30% or less of occupancy!

Your agent will work with your carrier to secure appropriate coverage. If this is not possible then find a different insurer for the property.

Remember to compare your vacant property quotes carefully.

As this is a non-standard market, insurers will be offering terms that may seem all over the map. Actual cash value or replacement cost basis, special perils or fire and extended coverage, and so on.

The cheaper quotes will likely have more coverage restrictions. So we always caution clients from choosing a policy based on price alone.

Saving a few hundred dollars now might sound very appealing. Yet if a loss happens, the uncovered amount will potentially be 100 times higher.